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We met with Great Canadian (GC) & Gateway management and visited several properties in the Vancouver marketplace on June 24th.  Overall, we walked away more positive on GC and continue to believe that the stock can continue to work on the back of several second half catalysts.  Below is a summary of our takeaways from the trip.

  • Economic impact has not worsened since 1Q09
  • Cost reductions are continuing
  • Competition remains rational and marketing spend is ROI focused
  • Gateway's leverage issues certainly are benefitting GC
  • Construction disruption at River Rock is less severe than Jan/Feb
  • Hastings ramp continues to be slower than expected

The market remains stable and is potentially improving.  Going forward there are a number of positive catalysts including:

  • Canada line opening & relocation of the bus hub
  • Opening of expansions at View Royal & Georgian Downs in 3Q09
  • Easy comparisons in 4Q09
  • Benefit from the Olympics in 1Q2010 - Hastings will close for 17 days, and Edgewater will have pedestrian access only, however we expect GC's other properties to benefit


The British Columbia (BC) gaming market is a duopoly between Great Canadian ("GC") (41% market share) and Gateway Casinos (38% market share).  Gateway was acquired by Macquarie & Crown Entertainment in November 2007. The transaction put a substantial amount of leverage on the company which will likely require a restructuring in the near future.

For the TTM ended March 31, 2009, the BC gaming market grew 1.5%.  However, when we strip out the new community gaming centers ("CGC") which opened during this period, the opening of Starlight Casino, and the addition of slots at Hastings, the market actually contracted approximately 4.5%.  In 2009 & 2010, there are only a couple of CGC's opening and no planned expansions.  The BCLC is forecasting that BC gaming revenues will be flat to slightly down in 2009.

Assuming that there is normal weather this winter, the 4Q comparison is easy given the severe weather in 4Q08.  The Olympics should provide a temporary benefit to gaming revenues in 1Q2010. Already, the infrastructure construction ahead of the Olympics seems to be benefitting the Vancouver economy.  It's unclear what the impact will be post Olympics in 2H2010.  Will the economy take a leg down once the infrastructure spending ends?  Will the additional real estate built for the Olympics further depress pricing?  Will the spotlight of the Olympics stimulate population growth?


Great Canadian Gaming Takeaways

Economic Impact:  Since GC gave guidance in 1Q09, there hasn't been a material change to the trends in the BC market.  It appears that things have remained stable, and even improved from Jan & Feb 2009, as the fear of a huge downturn has subsided.  The infrastructure work related to the coming Olympics is surely helping employment figures in the greater Vancouver area.

Cost cutting:  Cost cuts will continue to have a meaningful beneficial impact on results through 2009.  The main cuts include reduced operating hours, staff reductions (both on-site and at corporate), and supplier renegotiations. We believe that these changes are sustainable until there is an improvement on the demand side to justify longer operating hours and staff.  The deferred capex (like the hotel at River Rock) can come back when the demand is there.

Ron Baker: the controversial shareholder/ consultant is actually being quite helpful in instilling discipline to the organization.  We personally think that the scrutiny by the sell-side of the transaction was overblown last quarter.

River Rock:       

  • Construction disruption has definitively subsided to a minimum. There was noise in the entrance area, and the facility felt a lot smaller, but otherwise the impact was minimal especially compared to December & January.
  • Preparing to shut down the buffet for a few weeks. However, it has already been downsized and impacted by the construction.
  • Canada line will be complete by Labor Day, but the grand entrance with the curving escalators won't be complete until November 2009. There is also a hub bus stop being moved right near the Canada line stop which should bring more traffic to this location.
  • The convention business is holding up better than expected as many companies are keeping conferences local.
  • Also getting some "staycation" business on the weekends.


  • Still one of the most challenged properties in the GC portfolio. Ramp up from slots installed in Aug 2008 is still disappointing.
  • As background, the location was and still is highly contested from the surrounding residents. The bylaws in the area prohibit any signage, making it difficult to find the property. The facility is also prohibited from serving alcohol anywhere but designated eating/ bar areas. The opening of Grand Villa shortly after the slot opening didn't help either.


  • Dawson's Creek CGC & Nainamo are the two properties seeing the greatest impact from the economic slump. View Royal is holding up surprisingly well as are card rooms in Washington.
  • 4Q09 will benefit from easy comps, opening of the Canada line, and the opening of the new gaming additions at View Royal & Georgian Downs
  • 2Q09 Earnings tentatively set for August 10th


The Competition

River Rock, Boulevard, Starlight, Grand Villa, Hastings, and Edgewater are all located within (16 miles of each other)


  • Grand Villa is a very nice property, however, the question remains if the product is "too nice" for the demographics - ramping slower than expected, although since it has lapped the one year anniversary of the smoking ban that went in effect in April 2008, revenues and EBITDA are on an upward trend
  • Focused on cost cutting (enforcing early outs, ROI focus on marketing initiatives)


  • Seems to be doing really well from a revenue standpoint. They have been aggressive on the marketing side, going after the lower end grind customer. Unclear if they are buying the revenues or if the marketing programs are adding to the bottom line. Either way, Hastings at least is feeling the heat.

Retail First Look: 6/30/09


I've officially swapped out one of our three industry Macro themes.  Since early March, our themes have been 1) meaningful acceleration in 2H free cash flow, 2) balance of power beginning to shift back to US footwear (and to a lesser extent apparel) part of the global supply chain, and 3) the shakeout of industry consolidation, via the bankruptcy cycle, M&A, licensing, and the elevated value of consumer-direct order fulfillment assets.

With a 40% move in retail, stocks no longer going up on good news, and just about everyone I know is banking on earnings beats in 2H, it's pretty safe to say that theme #1 is a consensus call. As such, it is officially stricken from my list. Stick a fork in it.

The reality is that most companies can print whatever it is they WANT to print in 2H - but THE question is whether they are doing so in a way that is proactively building momentum into 2010, or is the company simply cutting too far into muscle and even bone, therefore leaving little to stand on in 2010. This exact dynamic is why I think that there will be a massive divergence in earnings trajectories beginning in 1Q10.

So how to assess the winners from the losers? The exhibits below should get you started. Chart 1 looks at a company's operating margin on the vertical axis, and SG&A ratio on the horizontal. Mark my words...if you go back 30 years (as we did) and look for every example of a brand that has crashed and burned, over 90% of the time you'll see a disproportionately low SG&A ratio relative to total operating margins. On the flip side, the companies that consistently defy gravity in the eyes of the Street are those that are usually beaten-up for 'spending too much money' in SG&A. Don't get me wrong, I'm not suggesting that companies should spend like drunken sailors. That has gotten many a company into a world of trouble. But we're at a critical juncture here where we need to respect the margin structure of these companies, and the behavior of management teams as it relates to which levers they are pulling on the P&L and Balance Sheet. 

Therein lies chart #2, which shows the directional move in margins vs SG&A over the past year. Yes, the companies in the middle are a jumbled mess... But that means you probably don't have to worry about them. Any company whose ticker stands out anywhere else on the chart is worth looking at and understanding in greater depth. The analysis does not necessarily give us all the answers, but it definitely makes us ask all the right questions.

Retail First Look: 6/30/09 - Op Margin SG A Margin Chart Q1 09


Retail First Look: 6/30/09 - SG A OM YY bps Change Q1 09 Chart


Some Notable Call Outs

  • With the political situation in Honduras escalating, we asked our Latin American specialist, Andrew Barber, for some commentary on what this might mean for Gildan and the textile industry. Andrew's comments: "The Organization of American States demanded Mr. Zelaya's immediate reinstatement, however it is unlikely that the OAS on its own will be able to prompt any economic sanctions by the Obama administration. If the UN general assembly, which is in session right now discussing the matter, leads to eventual action then the US might participate in sanctions that could have a material impact on Honduran exports, but it seems unlikely that this would happen very rapidly -probably several weeks at minimum if it even gets that far."
  • Relative to last summer, Payless moved their online BOGO promotion forward by two weeks and also increased the duration of the event. Payless' annual Buy One Get One Half Off sale lasted for 27 days this June, starting on the 2nd . The was 7 days longer than 2008's sale that started on the June 17th. Once again we suspect the weather had something to do with this.
  • While not nearly the same magnitude of the discounting in the luxury department store sector over the holiday period, Barney's just announced an additional 25% off its already reduced designer sale prices. Inventories across the luxury space are in better shape than 4Q, but I suspect Saks, Bergdorf's, and the branded luxury retailers will all put forth similar deals to keep inventories closely aligned with sales trends.


Zachs overview of items you're unlikely to find in the general press.

  • African Apparel Exports to US -The repeal of restrictive sourcing guidelines and continued duty free access to the U.S. market augur well for African apparel exports, according to a new United Nations report. The "Economic Development in Africa 2009" report concludes that as a result of the repeal, apparel suppliers from about 12 African countries, including Lesotho, Kenya, Madagascar, Mauritius and Botswana, could enhance their exports to the U.S. market. The director of UNCTAD's division for Africa, was upbeat African countries in about three to five years might become a more attractive destination for apparel manufacturers now located in Asian nations, such as China. <wwd.com/business>
  • South Africa Textile Industry Boost -The South African government has instituted a multifaceted rescue package in an effort to boost its embattled textile industry that includes dropping tariffs on certain imported fabric. The rescue package, termed the Customized Sector Program, comprises four components: support measures to improve manufacturers' competitiveness; capital upgrade measures embodied in an enterprise investment program, in which clothing, textiles and footwear manufacturers will be able to obtain preferential loans through the Industrial Development Corporation at prime minus 5%; skills upgrades, and the elimination of import duties on imported textile inputs, including fabric. The package is aimed at increasing the competitiveness of textile manufacturers, who have complained the South African government has not acted more decisively to safeguard their interests. <wwd.com/business>
  • Bangladesh Garment Workers Fight Back - Another apparel worker was killed Sunday in a clash with police at Ashulia in Dhaka Bangladesh on the outskirts of the capital one-day after the death of another worker in the area, police said. Over 150 people including 30 police injured in a string of clashes when police barred the demonstrating garment workers, protesting the Saturday's death of a fellow worker. Superintendent of Police Iqbal Bahar in Dhaka confirmed The Daily Star, a local newspaper, on Sunday afternoon that a worker had died in the incident. He however could not give identity of the deceased. The workers from around 50 factories attacked at least 15 garment factories and damaged over 50 vehicles. They barricaded the Dhaka-Tangail highway for over four hours, leading to traffic gridlock on either side. On Saturday, 26-year-old Al-Amin, the worker of a sweater factory, was killed and 25 others injured when Ansars personnel opened fire on agitators demanding a pay hike at the factory in Ashulia. The area remained tensed as the workers decided to continue abstaining from work until their demands were meet.  <allheadlinenews.com>
  • UK Consumer Confidence Increases - UK consumer confidence in the general economy for next year has increased and consumers expect their personal financial situation to improve. GfK NOP's overall index score increased to -25, nine points higher than this time last year and 14 points higher than its all time low. Confidence in the general economic situation during the last 12 months rose by six points to -73 on the previous month. However this remains seven points lower than this time last year. But confidence about the general economic situation for the next 12 months has risen by eight points to -8 - 37 points higher than June last year. <drapersonline.com/news>
  • Israel VAT Increases 1% - Israel VAT is rising by 1% tomorrow, from 15.5% to 16.5%, through the end of 2010. On January 1, 2011, value-added tax reverts back to 15.5%. In approving the measure, the Knesset also decided to increase the salary tax for financial institutions that do not pay VAT from 15.5% to 16.5%. The VAT increase is expected to yield the state NIS 2.4 billion in 2009 and NIS 4.8 billion in 2010. This is considered a regressive measure, since it disproportionately affects people with lower incomes. Prime Minister Benjamin Netanyahu and Finance Minister Yuval Steinitz resisted pressure to cancel the increase and instead to cancel the reductions in income tax and corporate taxes planned for 2010, which will benefit the very wealthiest members of society. <haaretz.com/hasen>
  • Supreme Court Case with NFL and License Deal - The Supreme Court agreed Monday to take up a case that could affect exclusive licensing deals between major sports leagues and manufacturers such as Reebok International that have made millions of dollars through licensing deals for apparel and accessories bearing team trademarks. The Supreme Court granted a writ of certiorari to American Needle Inc., a manufacturer based in Buffalo Grove, Ill., which sued the National Football League, National Football League Properties, its 32 teams and Reebok in 2004 alleging a violation of antitrust laws when the NFL entered into an exclusive, 10-year licensing deal with Reebok in 2001. At the center of the case is whether the league is a single entity that collectively enters into exclusive licensing deals without having an anticompetitive effect on the market or whether its 32 teams operate independently. <wwd.com/business-news>
  • German Government Loans to Quelle - After more than a week of political slaloming, the German government agreed late Monday to grant the bankrupt catalogue company Quelle a loan guarantee of 50 million euros, or $70 million at current exchange rates. This is widely considered the "last chance" rather than an all-out rescue for the floundering catalogue company, which is a subsidiary of the insolvent Arcandor Group. Quelle's management is currently working on a restructuring plan. <wwd.com/business-news>
  • Amazon Adds Another Company to its Growing Mobile Commerce Portfolio - Amazon has acquired SnapTell Inc., a developer of visual product search technology for mobile devices, for an undisclosed sum. SnapTell will become a part of A9.com, Amazon's search application development subsidiary. <internetretailer.com>
  • CMRG Amends Existing Poison Pill Plan - Casual Male Retail Group Inc. Monday said its board approved an amendment to its existing poison pill plan in order to preserve the value of prior losses, or net operating loss carryforwards (NOLs), to offset future profits. Poison pills are often used as an antitakeover mechanism. With the amendment, the beneficial ownership threshold is reduced to 5 percent of the retailer's common stock from 15 percent before the plan kicks into play. The amendment exempts stockholders who are considered beneficial owners who already own more than 5 percent, provided they did not acquire additional stock following the opening of business on Monday. The company said the change preserves the long-term value of NOLs and related tax benefits. <wwd.com/business-news>
  • End of the Road for High-end Children's Retailer Best & Co. - Children's Clothing Acquisition Co., doing business as Best & Co., filed a Chapter 7 petition for liquidation Friday in New Jersey and estimated assets and liabilities each of between $1 million and $10 million. Best & Co.'s 4,800-square-foot flagship high-end children's boutique, at 289 Greenwich Avenue in Greenwich, abruptly closed on Saturday. The firm also shuttered its catalogue and online business in recent days, which its Web site attributed to "technical difficulties."  Best & Co., which was founded in 1879, was originally a department store with a strong reputation in children's wear until going out of business in 1970 on Fifth Avenue and 51st Street. It was resurrected by Hilfiger in 1997 as a classic children's shop in Greenwich.<wwd.com/business-news>
  • Christopher & Banks Corp. Develops Concept Store C.J. Banks for Plus Size - While many of its competitors scale back on plus-size lines, the Minneapolis-based retailer will introduce a concept store that will house apparel from Christopher & Banks and its plus-size concept, C.J. Banks, under the same roof. The store, which will be about 5,000 square feet, larger than the retailer's typical 3,200-square-foot footprint, will have two separate entrances marked C.J. Banks and Christopher & Banks. The first concept store, which is set to launch at the end of July at an existing outdoor lifestyle mall in Scranton, Pa., will also carry petites. The idea came from customers who not only wanted to shop with friends or family, but also wanted the ability to buy both brands. <wwd.com/retail-news/>
  • Sears Aides Jobless Consumers - Sears Holdings Corp., the largest U.S. department-store chain, will let customers who lose their jobs suspend payments and keep appliances bought with store credit cards in an effort to bolster sales in the recession. Customers who spend at least $399 on appliances and related merchandise between July 6 and Aug. 1 will have one-twelfth of the purchase price credited to their account for every month they are out of work, said Larry Costello, a company spokesman. Those who are jobless for more than a year will have the full debt forgiven, he said. The offer period may be extended, he said. <bloomberg.com/apps/news>
  • Global Store Rents Decline - Store rents tumbled in the world's most expensive locations in the first quarter and will continue to decline through the middle of 2010 as the global recession curbs spending, according to CB Richard Ellis Group Inc. New York City kept its top rank from a year earlier as the most expensive retail market even as asking rents on Manhattan's Fifth Avenue fell 10% to $1,800 a square foot per year. Rents in Hong Kong's most desirable shopping area ranked second at $975 a square foot and Moscow was third at $790. Paris and Tokyo followed at $776 and $771, respectively.  Retail rents are falling around the globe as household wealth contracts, consumer confidence weakens and the jobless rate climbs. London ranked sixth in the survey at $677 a square foot per year, followed by Sydney at $624 and Zurich at $612. Los Angeles was ninth at $600 and San Francisco was 10th at $540. In the U.S., retail rents have been estimated to eventually decline 25% from the market peak in mid-2008. Buenos Aires rents had the biggest decline of the global markets surveyed, dropping 37 percent. Warsaw followed with a 33 percent decrease and Washington dropped 26 percent. Mexico City fell 14 percent and there were declines of at least 10 percent in Dubai, Barcelona, Athens and Dublin, CB Richard Ellis said. <bloomberg.com/apps/news>
  • Levi Launches New Marketing Approach Focused on the New Generation - The tens of millions of Americans in their teens and 20s compose a market as hard for advertisers to figure out as it is alluring and lucrative. Along comes Levi Strauss & Company with a campaign for its flagship Levi's brand, hoping to appeal to those younger consumers with an ambitious call to arms: "Go forth." The campaign, which begins Wednesday, will include commercials on television, online and in movie theaters; print advertisements; outdoor and transit signs and posters; social media sites like Facebook; event marketing; and a contest on a section of the brand's own Web site. The campaign is meant to buff the image of the Levi's brand as much as sell products like 501 button-fly jeans. The hope is that "Go forth" will resonate with young America today the same way that campaigns like "501 blues" and "501 U.S.A." successfully appealed to a generation two decades ago. The "Go forth" campaign is replete with Americana imagery, in keeping with research indicating that teenagers and 20-somethings are patriotic and optimistic about the United States. <nytimes.com/business/media>  
  • Indie Men's Wear Label Yoko Devereaux Is Halting Operations - Founder and designer Andy Salzer said he is winding down the company in the next few weeks because business partner Wing Son Garments, a Toronto-based private label manufacturer, is withdrawing funding and production resources. Yoko Devereaux was founded in 2000 by Salzer and Thomas Meus, who left the firm after several seasons. Salzer went on to grow it from a fledgling T-shirt brand into a full men's collection that appealed to the downtown crowd and is carried in about 200 doors, including Nordstrom, Saks Fifth Avenue, Revolve Clothing and Rolo. This past spring, Salzer launched a diffusion label, called Yoko D., exclusively in Urban Outfitters stores. The line, which included a woven shirt, tank top, shorts and a jacket, is carried in a majority of the specialty chain's 143 doors. As with the main collection, the fall Yoko D. line will not be produced. <wwd.com/business-news>
  • bebe Picks Former Forever21 Exec for Merchandising Post - Women's apparel retailer bebe stores inc. has appointed Kathy Lee, a former senior vice president of merchandising at competitor Forever 21, as chief merchandising officer. <internetretailer.com>
  • Justin Boot Co. Launches Collection with Music - Justin Boot Co. is using the country music industry to launch its Justin Bent Rail collection of edgy western looks targeting 18-to-24-year-old consumers. "Bands in the alternative country scene are popular with that crowd," said spokesperson Megan Force, referring to the collection's core audience - particularly those living in the southern and western parts of the U.S., where these bands are most well known. The Fort Worth, Texas-based company will promote the line through a marketing program that focuses on interacting with consumers. Initiatives include social media programs on MySpace, Facebook and Twitter, as well as exclusive live concert video streams and mobile text-to-win promotions. On the more traditional marketing side are POS materials and gift-with-purchase perks such as music download cards. <wwd.com/business-news>
  • CEO of New Balance Joins AAFA - Rob DeMartini, CEO of New Balance, is joining the board of directors and executive committee of the American Apparel & Footwear Association. According to a statement from AAFA on Monday, DeMartini will fill the board position vacated by Jim Tompkins, former president and COO of New Balance, who left earlier this month. "With all of the challenges currently facing the U.S. apparel and footwear industry, Rob's insight and experience will be invaluable," Kevin Burke, president and CEO of AAFA. <wwd.com/business-news>
  • HOTT and Harry Potter - Warner Bros. Consumer Products (WBCP), along with its prominent retail partner, Hot Topic Stores, will hold a one-time fan event in Paramus, New Jersey, featuring Harry Potter star Tom Felton, in support of the highly anticipated upcoming feature film, Harry Potter and the Half-Blood Prince. Hot Topic will give fans the opportunity to own the limited-edition Harry Potter and the Half-Blood Prince T-shirt, available exclusively at the Hot Topic store at the Garden State Plaza in Paramus, New Jersey. As part of the retail program in support of Harry Potter and the Half-Blood Prince, each of the 679 Hot Topic stores across the United States are featuring Harry Potter window store-front displays and merchandise boutiques, offering the widest selection of Harry Potter products, including hoodies, T-shirts, wallets, messenger bags, accessories and more. <finance.yahoo.com/news>


CWTR: Piper Jaffray initiates with a Buy, price target $9.

JWN: RW Baird initiates with an Outperform

COH: RW Baird initiates with an Outperform

JCP: RW Baird initiates with a Neutral

GPS: RW Baird initiates with a Neutral



PSS: Matt Rubel, CEO, sold 6,000shs ($87,720) less than 2% of total common holdings.



 Retail First Look: 6/30/09 - Trading Callouts



Gone With The Wind

"With enough courage, you can do without a reputation."
-Rhett Butler (Gone With The Wind)
On this day in 1936, Gone With The Wind was first published. If you know any Depressionista who has yet to see the movie, send me their email address - the title is a great metaphor for the consensus storytelling they plugged the manic media with only 3 months ago. Maybe I'll send them a copy. Then they'll see what a real Depression looks like.
Three months is a long time - if you're short the best quarterly move in the US stock market since 1998 that is! I often smile when I hear of Wall Street's "long term" investors - some of them can't seem to muster bucking up for stocks when they should actually buy them for the long run. Then they complain that people that do are "just traders." Leave your scorecards with the clubhouse guys, and don't forget to sign them - this game is now being YouTubed.
While the June we put up was below average at best, April and May were two of the biggest months of our careers. Looking back, I will not mistake our Q2 for anything other than what it was - not being on the wrong side of a massive market move.
As of last night's close, the SP500 and Nasdaq were up +16.2% and +20.6% for Q2, respectively. If you're not into making proactive "market calls", you can look at those returns and say goodbye. Who needs those kinds of numbers for the long run, right? Don't worry, you're definitely not going to see them again in Q3. Now they're "gone with the wind."
Tomorrow will be a new day, month, and quarter. The people of Iraq will be "free", sort of... and the price of geopolitical risk will continue to rip higher at gas pumps worldwide. If the price of gas isn't high enough by year end, the Russians announced this morning that they'll be raising it by another +10% in 2010 anyway. Ah the unintended consequences of Burning that Buck. Putin, Ahmadinejad, and Chavez, have at it.
After seeing the REFLATION trade associated with Burning The Buck morph into consensus in mid-June, we have ourselves quite an interesting setup developing in global equities. Should I stay or should I go? Will the US Dollar find a bid in July like it did in January? Or will its credibility continue to be gone with the wind? Predictably, after seeing equity deals quintuple in Q2 (vs. last quarter) to $26B, the bankers are back, and Jaime Dimon is already talking about raising them banker base salaries! Great Depression?
If you want to see who the real "short-term" investors in this country are, look no further than Washington and Wall Street - dollar down gets the bankers, politicians, and US debtors paid. Trading down at $79.64 this morning, the US Dollar Index is stoking the fires of inflation. Inflation? As Scarlett O'Hara replied, "I can't think about that right now. If I do, I'll go crazy. I'll think about that tomorrow."
My Macro team's call is that REFLATION will morph into INFLATION by Q4. I know, I know... that's not what Bernanke is forecasting, but that's the point. Run an accountability check on the poor man's inflation forecasts for the last 3 years!
No one in the politicized Federal Reserve system is allowed to make this call, yet...
They will have to once reported inflation (CPI and PPI) accelerates on a year over year basis in Q4. The Q4 2008 comparisons for basically anything with a marked-to-market price are incredibly low. Do the math; it won't take your investment team very long to get answers we have.
For all of my "invest for the long run" fans out there, in terms of levels, here are 3 lines in my 27 line model that matter right now:
1.    US Dollar Index $82.18

2.    Oil $68.67/barrel

3.    Copper $2.19/lb

If these price levels hold (i.e. the USD doesn't breakout above that line and oil/copper don't break down below those lines), we will begin to see REFLATION morph into INFLATION in Q4. If these and the other 24 prices in my model change, I will. That's it. That's my call.
So what to do with this call? Well, I'm kind of a day-to-day risk manager type of a guy. So I'll when I wake-up to new prices tomorrow, I'll let you know. While the "long term" folks seemingly don't worry so much about getting wet while walking outside on days that it's raining, I'll be sure to have some umbrellas on hand. My Scottish golf caddy, Fraser, gave me a great big one.
That great big quarter we just printed is gone with the wind. Congratulations to some of our clients who we know had monster quarters - upward and onward we go.
I have immediate term upside resistance for the SP500 at 935, and I'll start making some sales there. We crossed a critical breakout line of immediate term TRADE support at 920 yesterday. Use that tiger line as the one that needs to hold, or we'll be out of bounds again on the bullish momentum side of this market.
Best of luck out there today,


EWZ - iShares Brazil-President Lula da Silva is the most economically effective of the populist Latin American leaders; on his watch policy makers have kept inflation at bay with a high rate policy and serviced debt -leading to an investment grade credit rating. Brazil has managed its interest rate to promote stimulus. Brazil is a major producer of commodities. We believe the country's profile matches up well with our re-flation theme.

QQQQ - PowerShares NASDAQ 100 - We bought Qs on 6/10 to be long the US market. The index includes companies with better balance sheets that don't need as much financial leverage.

EWC - iShares Canada - We want to own what THE client (China) needs, namely commodities, as China builds out its infrastructure. Canada will benefit from commodity reflation, especially as the USD breaks down. We're net positive Harper's leadership, which diverges from Canada's large government recent history, and believe next year's Olympics in resource rich British Columbia should provide a positive catalyst for investors to get long the country.   

XLE - SPDR Energy - We think Energy works higher if the Buck breaks down.  

CAF - Morgan Stanley China Fund - A closed-end fund providing exposure to the Shanghai A share market, we use CAF tactically to ride the wave of returning confidence among domestic Chinese investors fed by the stimulus package. To date the Chinese have shown leadership and a proactive response to the global recession, and now their number one priority is to offset contracting external demand with domestic growth.

TIP- iShares TIPS - The iShares etf, TIP, which is 90% invested in the inflation protected sector of the US Treasury Market currently offers a compelling yield on TTM basis of 5.89%. We believe that future inflation expectations are currently mispriced and that TIPS are a compelling way to own yield on an inflation protected basis, especially in the context of our re-flation thesis.

XLV- SPDR Healthcare - We re-initiated our long position in healthcare on 6/30.  Our healthcare sector head, Tom Tobin, wants to fade the public plan, and he's been right on this one all year.


EWI - iShares Italy - Italian Prime Minister Silvio Berlusconi has made headlines for his private escapades, and not for his leadership in turning around the struggling economy. Like its European peers, Italian unemployment is on the rise and despite improved confidence indices, industrial production is depressed and there are faint signs at best that the consumer is spending. From a quantitative set-up, the Italian ETF holds a substantial amount of Financials (43.10%), leverage we don't want to be long of.

XLY - SPDR Consumer Discretionary - We shorted XLY on 6/19 as our team has turned negative on consumer in the last week.  

XLP - SPDR Consumer Staples - We shorted XLP on the bounce on 6/17.   

SHY - iShares 1-3 Year Treasury Bonds - If you pull up a three year chart of 2-Year Treasuries you'll see the massive macro Trend of interest rates starting to move in the opposite direction. We call this chart the "Queen Mary" and its new-found positive slope means that America's cost of capital will start to go up, implying that access to capital will tighten. Yields are going to continue to make higher-highs and higher lows until consensus gets realistic.

UUP - U.S. Dollar Index - We believe that the US Dollar is the leading indicator for the US stock market. In the immediate term, what is bad for the US Dollar should be good for the stock market. Longer term, the burgeoning U.S. government debt balance will be negative for the greenback.

EWW - iShares Mexico - We're short Mexico due in part to the repercussions of the media's manic Swine flu fear.  The country's dependence on export revenues is decidedly bearish due to volatility of crude prices and when considering that the country's main oil producer, PEMEX, has substantial debt to pay down and its production capacity has declined since 2004. Additionally, the potential geo-political risks associated with the burgeoning power of regional drug lords signals that the country's economy is under serious duress.

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The USDA Food Safety and Inspection Service announced yesterday that JBS Swift has expanded a voluntary recall to approximately 380,000 pounds of beef products following 24 reported cases of E. coli in multiple states, 18 of which have been linked to products processed by the firm. Swift is the third largest US processor of beef and pork.

We went long the ETN COW in our portfolio on June 16 based on overlapping quantitative factors, seasonal inflections and macro events in South America. Since then a cull of dairy cows driven by milk prices has contributed to the perception that US Cattle headcount will shrink further.

Now, with several slaughter facilities destroying product due to E. coli concerns, the market anticipation is that the demand for beef will increase as producers fill outstanding orders. Obviously, whether this scare is enough to put a sizeable amount of US consumers off beef for a while is the wild card.

Yesterday's health scare is an unanticipated external event helping our position, and while the full impact of this outbreak on the market not yet clear, we remain confident in our thesis.


Andrew Barber



How High Can We Go?


Within the framework of volatility and volume getting annihilated, the SP500 is also in the midst of making a series of lower-highs. On balance, that's less bullish than where we were in April-May.  Then again, that was when an orangutan could make money on the long side. This is tougher. Trading the range usually is.

 So how high can we go? Below I have outlined 3 important lines:

1. The immediate term breakout TRADE line = 920

2. Immediate term TRADE resistance = 935

3. The YTD closing high = 946

Given that the US Dollar is starting to fall again (Bernanke has kept the free money on the tables), anything can happen here. For now, I'm playing for 935 - but into month end and an employment report on Thursday (which I think will be better than expected), be careful with those high short interest short positions.


Keith R. McCullough
Chief Executive Officer

 How High Can We Go?  - a1

Chart of the Week


"Endless money forms the sinews of war."


Our guru of everything China here at Research Edge, Andrew Barber, put together the picture below. Sometimes pictures are far more powerful than prose, so I'll cut this note short.

What you see in the Ben Bernanke quote below is the product of the most highly politicized US monetary policy in American history. When the US Federal Reserve was established prior to World War I, this was not the objective. The objective was to protect the credibility of one's currency and prevent financial panics.

Free money policy will continue to erode the currency that backs it. For the immediate term TRADE, unlimited credit creation backed by nothing other than political compromise will continue to be positive for REFLATION. In the long run however, this groupthink of levering up America's future will be dead.

The Chinese are selling. Watch what they do, not what the manic media interprets them as saying.


Keith R. McCullough
Chief Executive Officer

Chart of the Week - a1

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